Sanctioning food: Fueling opportunity

Patrick L Young is CEO of niche crowdfunding platform HanzaTrade and an advisor to fund managers throughout the world. Born in Ireland, he is an active investor in the “New Europe” amongst other emerging markets and is an active Co Founder of grassroots startup group "Mission ToRun."
Home Page: http://patricklyoung.net Twitter: @FrontierFinance

For all those who believe in big government, food provision is a
good place to start disabusing the quaint (and horribly flawed)
notion that the public sector can be more efficient.

Chairman Mao starving a few million to death and Stalin not doing
much better ought to have been a clue, but sadly some deluded
souls still think big government can best serve their needs
despite the clear evidence to the contrary. Over 20 years into
the transition from central planning to a free market, the legacy
of Communism’s destruction is still writ large in the Russian
agricultural market.

That in essence is why the latest spat in the sanctions
shenanigans delivers an intriguing incentive to Russian farmers.

Of course, in the short term there may be an opportunity for
another pivot substitution. In any case, simply implementing the
blunt bludgeon of sanctions has become an increasingly flawed
approach.

When the West was dominant in the global supply chain, a modest,
unified front in sanctions could de facto shut off supply.
Nowadays the increasing breadth of globalization has left
multiple nations perfectly positioned to provide substitute
products in a broad range of goods.

Thus Western nations probably come off worse in Russia’s
retaliatory sanctions as the fragile eurozone economy will
clearly suffer as food is exported from South America instead of
via the EU’s bloated subsidy regime.

Moreover, European suppliers may have to accept lower prices to
sell their produce elsewhere.

Will Russia pay more? This depends on how swiftly producers (at
home or abroad) can fill the gap – buying precisely the same
processed brands through black market channels will of course
cost more, but the substitution effect in core groceries may not
be so marked. Besides, older Russians used to shortages in the
bad old days may find it easier to migrate back to more staple
local foodstuffs as opposed to imported seasonal
fruit/vegetables, and particularly processed products.

A key challenge for Russia will be galvanizing private
agriculture to make the leap forward to productive standards
commonplace in the West – a point already clearly made by Prime
Minister Medvedev.

Food productivity in Russia still lags hugely behind the
standards of Western nations. Russian crop yields are often less
than a third of the levels commonplace in the EU. That makes for
a huge opportunity to profitably feed more citizens from the
nation’s farms.

In sanctioning Western imports, Russia has simultaneously thrown
down the gauntlet to its private farming industry to fill the
legacy void created from the daft destruction of Comrade Stalin
onwards.

This is perhaps the oddest possible side effect of a situation
where many tables seem to have turned. In the old days it was
Russia which headed a subsidy-ridden stagnant economy where the
power of regulatory fiat and central government power was
ultimately going to destroy the multinational power bloc which
was the Soviet Union. Now it is Brussels which heads a remarkably
stagnant multinational entity where the central government
meddles incessantly, but fails to actually deliver a better
standard of living while spending breathtaking sums on agitprop
to convince the population of the benefits of European Union.

This isn’t a precise metaphor, but it is a very ugly one for
those who are fans of economic growth and greater prosperity.

The EU has just lost about 10 percent of its total food exports
at a stroke. Another $16 billion or so of trade going up in smoke
is hardly something the becalmed (to put it kindly) eurozone
economy can afford. At the same time, this entire tit-for-tat of
sanctions is ultimately a fools’ errand when it comes to growth,
as the more each nation tries to intentionally harm its
neighbors, the more third party countries are actually gifted an
advantage.

Imposing a one-year ban on agricultural imports suggests Russia
wants to see more dialogue, and certainly it might be better to
discuss and investigate tragic recent events rather than shooting
from the hip to attribute blame.

All actors who indulge in sanctions are playing a very dangerous
game. The world economy remains precarious: neither Europe nor
Russia can truly afford to indulge in economic brinksmanship that
endangers their citizens’ welfare. Russia has gambled that it can
close the productivity gap. The EU has merely gambled. It is
difficult to see just where it can sell its surplus foodstuffs.

Brinksmanship risks delivering a lose-lose scenario for the
entire world.

The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.